A letter of intent, often called an LOI, for the sale of a business usually contains a variety of provisions. Some provisions may be binding, while others are unenforceable. The proposed price and deal structure are usually nonbinding, while confidentiality, exclusivity, expenses, and governing-law provisions may be binding. The wording matters because North Carolina courts may enforce an LOI, or parts of it, when the document shows that the parties intended to create definite obligations.
What Does a Letter of Intent Do Before the Purchase Agreement?
A letter of intent records the parties’ preliminary agreement on the main features of a proposed sale. It gives the buyer and seller a framework for due diligence and preparation of the definitive purchase agreement.
An LOI is not a substitute for that final contract. In many ways, an LOI is an agreement to agree at a later date, which is often unenforceable. The purchase agreement addresses representations, warranties, indemnification, closing conditions, and other details that are often unresolved when the LOI is signed. Parties considering business mergers and acquisitions should clearly identify which preliminary terms are binding and which remain subject to negotiation.
Are Price and Transaction Structure Binding?
Price and transaction structure are commonly nonbinding. The LOI may state an expected purchase price and whether the sale will involve assets, equity, cash, seller financing, or another arrangement. It may also describe working-capital adjustments or an earnout.
These terms should usually remain subject to due diligence, negotiation, and execution of a definitive agreement. Language stating that the parties “agree to sell” at a fixed price can create more risk than language describing a proposed transaction.
Which LOI Provisions May Be Binding?
Even when the sale itself remains nonbinding, the parties may choose to make several provisions enforceable:
- Confidentiality: Limits how the parties may use or disclose financial records, customer data, trade secrets, and information about the negotiations.
- Exclusivity or no-shop: Prevents the seller from soliciting or negotiating competing offers for a defined period.
- Access and due diligence: Establishes the buyer’s access to records, facilities, employees, or advisers, subject to reasonable limits.
- Expenses: States whether each party pays its own costs or whether one side must reimburse specified expenses.
- Governing law: Identifies which state’s law governs the binding portions of the LOI and may address where disputes must be heard.
The document should label these provisions individually rather than relying on a general statement that the LOI is “mostly nonbinding.” It is also helpful to include a severability clause, stating that if one part of the LOI is found to be unenforceable, the rest of the LOI will remain in effect.
How Should an LOI Address Termination?
The LOI should explain when its binding obligations end. Termination may occur on a specified date, by mutual written agreement, when either party gives notice, or when the definitive agreement is signed.
Some provisions may need to survive termination. Confidentiality and expense obligations, for example, may continue even after negotiations stop. An exclusivity clause should have a clear expiration date so the seller is not restricted indefinitely.
Should Financing and Approval Contingencies Be Nonbinding?
A buyer may need financing, investor consent, or approval from a board or other governing body. The LOI should state that the proposed acquisition remains contingent on those events if they have not yet occurred.
Regulatory approval, landlord consent, or permission to assign a major contract may also affect the sale. Identifying those conditions early can reduce the legal challenges that arise in mergers and acquisitions without suggesting that either party must close before the conditions are satisfied.
How Can You Avoid Accidental Commitments?
Calling a document a “letter of intent” does not automatically make it nonbinding. To reduce ambiguity, the LOI should:
- State that no obligation to complete the transaction exists until the parties sign a definitive agreement
- Identify every provision intended to be binding
- Avoid mandatory language in nonbinding business terms
- Clarify whether either party may end negotiations at any time
- Avoid requiring good-faith negotiation unless that obligation is intentional
Emails, conduct, and later communications should also remain consistent with the LOI’s stated effect.
When Should a Business Attorney Review the LOI?
Counsel should review the LOI before you sign it, ideally while its terms are still being negotiated. Early review can reveal unintended obligations, overly broad exclusivity restrictions, missing contingencies, and language that may weaken your position in the definitive agreement.
Set the Ground Rules Before Negotiations Advance
An effective LOI gives both sides direction without prematurely committing them to a sale. Patrick, Harper & Dixon, LLP helps North Carolina buyers and sellers draft, review, and negotiate letters of intent that reflect their actual business objectives. Contact us to discuss your proposed transaction before signing.
